According to Jadwa Investment, the main reasons for this are a lack of confidence, the small role of institutional investors and a lack of investor awareness of economic conditions. "Investor confidence has begun to pick up this year and we expect the outperformance of the Saudi market so far in 2010 to continue," the Jadwa report said.
The TASI (Tadawul All-Share Index) is up by 54 percent since its mid-March low. For the US S&P500 the gain is 62 percent. "Given the domestic growth dynamic within the Saudi economy (the nonoil private sector grew by 2.5 percent in real terms last year compared to a contraction of 2.5 percent in the US), we would expect performance to be closer to that of emerging markets; however, the divergence here is even greater. The MSCI emerging markets index is 96.5 percent above its low, also in early-March," the report added.
Economic performance throughout the world has improved over the year, justifying some recovery in share prices from their lows, but the recovery remains fragile. In contrast, nonoil private sector growth in the Kingdom was 2.5 percent last year and is expected to rise to close to 4 percent in 2010. Furthermore, while most of the leading global economies have emerged from recession, performance will be damped in the medium term by the following serious underlying problems that the Kingdom does not face:
- Much of the recent global recovery is the result of fiscal stimulus that has created unprecedented budgetary problems, with budget deficits exceeding 10 percent of GDP (gross domestic product) in many leading economies. This level of spending is unsustainable and one of the key challenges for global policymakers next year is how to unwind the stimulus. There has also been a large stimulus in Saudi Arabia, but the Kingdom has no budgetary problems and can call on net foreign assets of $390 billion to finance any deficits.
The deleveraging process in many leading economies still has a long way to run. This will involve both consumers and companies increasing their savings and therefore spending a smaller proportion of their income. In contrast, debt in the Kingdom is relatively low and the purchase of goods and services using borrowed money was not an important factor in the strong economic performance in the years to 2008.
- Unemployment is very high in many parts of the world and uncertainty over the labor market is an important restraint on consumer spending. In Saudi Arabia, however, the impact of the economic downturn on the labor market has not been great.
Given the stronger economic fundamentals, Jadwa thinks the following factors account for the relative underperformance of the Saudi stock market:
Many investors were braced for the worst and sentiment shifted fairly quickly when the global economy bottomed out. Markets throughout the world were lifted and the Kingdom benefited notably from this until the troubles at two large local private sector companies emerged, which severely dented local confidence. Confidence was set back by the debt problems in Dubai.
Professional institutional investors responded quickly to attractively-valued companies and signs that economies were bottoming. In the US, institutional inflows pulled up the market and rising share prices gave retail investors the confidence to re-enter the market much later in the year. Institutions such as mutual funds and corporations have been net buyers in the Saudi market (SR3.75 billion and SR19.2 billion respectively since March 2009), but they only have a small share of the market and their buying has not been large enough to impact on the sentiment of retail investors.
It was clear when the US and other economies hit their bottom and began to strengthen due to the high visibility and frequency of economic data. Major economic releases get widespread media attention and a large volume of monthly data make turning points and trends relatively easy to spot. In the Kingdom, the limited availability of data means that people are generally less sure of how the economy is performing.
Of these factors, it is confidence that will have the clearest and quickest impact on the market. Greater institutional investor participation and heightened investor awareness are only likely over the long term. With retail investors still dominating the Saudi market (they accounted for 91 percent of total trades in January), changes in confidence quickly translate into changes in share prices that can build their own momentum even if relatively little happens to the fundamentals. This is one factor why the market has been volatile over the last five years.
Jadwa thinks that investor confidence is set to improve in the Kingdom as the economy picks up this year. However, Jadwa is cautious about the performance of global stock markets and the impact this could have on the TASI.
The global economic recovery has gained momentum so far this year, with strong growth recorded in the US and Japan, the world's two largest economies. But share prices have not responded and most global markets have dropped. One reason for this is that investors had already priced in a recovery through to the middle of the year and are now looking at the risks ahead. Any setbacks to the recovery are likely to hit global markets and this is likely to be reflected in the Saudi market even as the local fundamentals improve.
